What is rentvesting?
Rentvesting sees a person renting a home in a suburb they like while purchasing an investment property, perhaps one with fewer bedrooms or in a more affordable area.
It can act as an entry point into the market for first home buyers who might otherwise find saving a deposit or securing a mortgage significant barriers to buying a suitable property for them in a location they want to live. Rather than settling for a cheaper property or suburb, many have weighed up other options—one being rentvesting.
Who does rentvesting suit?
Rentvesting lets you live where you want, be it close to work, family, or lifestyle amenities, while building equity through a property investment elsewhere.
The types of people that rentvesting may suit include:
- Younger people who have been priced out of inner-city locations
- Single-parent households who put importance on where they raise a family
- Families seeking pricier locations or larger properties to accommodate them comfortably.
Pros of rentvesting
Lifestyle
Rentvestors can enjoy the perks of living in a neighbourhood they love, be it an inner-city area or a family-friendly suburb, and reap the potential benefits of owning a property elsewhere, like an outer-city suburb, without having to pay a premium for location.
In such instances, you may avoid the pitfalls of living in a less-than-ideal location or servicing a hefty mortgage for a home in a pricier suburb.
Potential to build equity
By buying an investment property in a more affordable location, potentially with a much smaller deposit, rentvestors can start building equity earlier without being completely locked out of the property market.
A more affordable home also means smaller mortgage repayments, which can easily be added to your budget.
Greater borrowing power
Rentvesting can boost your borrowing power, as lenders generally count your projected rental income when checking what you can afford in regular repayments. That extra stream of income could help you borrow more and buy a more expensive property.
Rental income
Income earned from renting out your investment property can be used to cover its mortgage, or to pay off the debt sooner. Any excess could also finance your rental payments on your home.
Keep in mind that your lender may still prefer to see you can afford your repayments if the property is vacant between leases and isn’t earning any rental income.
Potential tax benefits
As a rentvestor, you can potentially claim interest charged on your mortgage and other costs related to your investment property as tax deductions against rental income earned.
No maintenance burden on your rental dwelling
As a renter, the onus is on the landlord to ensure the property you’re living in is maintained and utilities are in working order. Issues such as electrical, hot water, leaks, air-conditioning, and building deterioration are at the landlord’s cost.
Cons of rentvesting
Investor vs owner-occupier mortgages
There are some key disadvantages when it comes to buying an investment property over buying a home to live in.
Generally, lenders impose higher interest rates on investment home loans than on owner-occupied home loans, meaning your repayments could be higher compared to a comparable owner-occupier loan.
Buying a property also involves upfront costs such as your deposit, stamp duty (which is higher for investors than owner-occupiers in some states), and possibly Lenders Mortgage Insurance (LMI), depending on your loan-to-value ratio (LVR). This could up tens of thousands of dollars on top of your mortgage.
Being a rentvestor also means juggling both mortgage repayments on your investment property, and rental payments for the place you live in. The danger of falling into financial precarity can be greater, especially if you were to experience aany sudden loss in income.
Property investing risks
There’s also a real risk that your investment property’s value could decline over time, or you could face unexpected repair or maintenance bills, which could put you into a difficult financial position.
Loss of tax benefits and first home buyer incentives
Investment properties are generally subject to capital gains tax (CGT) if sold for a profit. Expect to pay this tax if you plan to upsize, downsize, or simply sell your investment in the future.
Property investors also typically forfeit access to government schemes exclusive to first home buyers who intend to live in their property, including but not limited to:
- 5% Deposit Scheme
- Stamp duty waivers
- First home owner grants
- First Home Super Saver Scheme (FHSS)
Changing your mind
If you change your mind a few years into rentvesting, the costs of reversing course may exceed your earnings from rentvesting in the first place. Carefully calculate if it would be better to stay the course or to quit outright.
Landlord responsibilities
As discussed above, if tenants are living in your investment property, they are responsible for paying their rent on time.
You, as the landlord, are responsible for maintenance, upkeep, and safety of the property, as well as costs such as council rates, some utility services (outside of usage), and any potential body corporate fees.
Rental market challenges
The owner of your rental may not be as flexible or understanding as you’d like them to be, and the rental market can be a competitive place. You may not always be able to get the lease terms you prefer and, in some cases, you may be required to vacate the property with limited notice.
How does buying a home compare to rentvesting
Compared to rentvesting, buying a home to live in means you may not be able to afford to live in the area you desire, which could limit your lifestyle. For example, you may find yourself spending more time stuck on the road getting to and from work.
You also may not be able to borrow as much to purchase your home because you won’t have a potential rental income stream.
However, there are many advantages to consider:
- You may be able to benefit from first home owner grants, stamp duty waivers, and LMI-reducing schemes, offsetting some of your upfront costs.
- Interest rates on owner-occupier home loans are generally lower than on investment mortgages.
- If you choose to sell your home in the future, you may be exempt from paying capital gains taxes on profits earned (provided certain conditions are met).
- You never have to face lease expiry, rent increases, or forced moves by a landlord (though, your interest rate may rise, impacting your repayments).
- You get to renovate, paint, or keep pets without anyone else’s permission.
Is rentvesting right for me?
Whether rentvesting is right for you will boil down to your current situation, plans for the future, and financial goals.
Serious consideration and planning should go into any property-buying decision, and the lifestyle impacts should be weighed just as much as the financial impacts.
Here are some factors to consider before choosing to become a rentvestor.
- Know your long-term goals and understand your borrowing capacity.
- Make sure your budget can accommodate both rent and property expenses, with a healthy emergency cash buffer.
- You should be comfortable with managing tenants, vacancies, and ongoing maintenance as a landlord.
If you find this process too intimidating or stressful, buying a home to live in may be the correct choice for you.
If rentvesting is appealing, it’s important to carefully weigh the potential trade-offs between buying, renting, and rentvesting, and consider seeking professional advice from a mortgage broker or financial adviser before you make the final call.
